Stav Investments Pty Ltd v Taylor

[2022] NSWSC 208

Supreme Court

New South Wales

Medium Neutral Citation:

Stav Investments Pty Ltd v Taylor; LK Group Investments Pty Ltd v Taylor [2022] NSWSC 208

Hearing dates:

5 – 13 October 2021

Date of orders:

9 March 2022

Decision date:

09 March 2022

Jurisdiction:

Equity

Before:

Ward CJ in Eq

Decision:

1. In the Stav proceeding, order that each of the first and second defendants pay Stav Investments damages of $1,012,500.00 for contraventions of s 1041I of the Corporations Act 2001 (Cth), s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (NSW).

2. In the Stav proceeding, dismiss the second plaintiff’s claims.

3. In the LK Group Investments proceeding, order that each of the first and second defendants pay LK Group Investments of $1,012,500.00 for contraventions of s 1041I of the Corporations Act 2001 (Cth), s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (NSW).

4.   Order that the first and second defendants pay the plaintiffs’ costs of the proceedings.

Catchwords:

CORPORATIONS — Misleading or deceptive conduct — “No transaction” case — Where defendants made various warranties and representations to the plaintiffs as to their ownership of valuable intellectual property, and the value of their company — Representations as to future matters — Silence or non-disclosure — Where plaintiffs induced to invest in defendants’ company on the basis of representations — Where defendants’ company not a going concern — Whether plaintiffs entitled to recover totality of their investments

CORPORATIONS — Misleading or deceptive conduct — Contributory negligence and proportionate liability

CONTRACTS — Breach of contract — Where defendants made various contractual warranties which were in fact false — Causation — Whether falsity of warranties causative of plaintiffs’ loss

Legislation Cited:

Australian Consumer Law, s 236

Australian Securities and Investments Commission Act 2001 (Cth), ss 12BAB, 12GF, 12GP, 12GR

Civil Liability Act 2002 (NSW), s 3, Part 4

Civil Procedure Act 2005 (NSW), ss 19, 65

Competition and Consumer Act 2010 (Cth), ss 87CB, 87CD, 131A, 137B, Schedule 2

Copyright Act 1968 (Cth), ss 10, 29(1)(a), 32, 35

Corporations Act 2001 (Cth), ss 436C, 1041I, 1041H, 1041L, 1041N

Fair Trading Act 1987 (NSW), s 28(1)(b)

Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 9

Legal Profession Uniform Law Application Act 2014 (NSW), Sch 2

Limitation Act 1969 (NSW), s 14

Uniform Civil Procedure Rules 2005 (NSW), r 6.2

Cases Cited:

ABN AMRO Bank NV v Bathurst Regional Council (2014) 224 FCR 1; [2014] FCAFC 65

Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470

Alati v Kruger (1955) 94 CLR 216; [1955] HCA 64

Anchorage Capital Master Offshore Ltd v Sparkes (No 3); Bank of Communications Co Ltd v Sparkes (No 2) [2021] NSWSC 1025

Andrews v Racken Pty Ltd [2007] NSWSC 1010

Appleby v Johnson (1874) LR 9 CP 158

Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6

Australian Competition and Consumer Commission v Original Mama’s Pizza and Ribs [2008] FCA 370

Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; [2013] HCA 54

Australian Competition and Consumer Commission v Valve Corporation (No 3) (2016) 337 ALR 647; [2016] FCA 196

Australian Securities and Investments Commission v Narain (2008) 169 FCR 211; [2008] FCAFC 120

Ballas v Theophilos (1957) 98 CLR 193; [1957] HCA 90

Banque Commerciale SA (in liq) v Akhil Holdings Ltd (1990) 169 CLR 279; [1990] HCA 11

Barclay Mowlem Construction Ltd v Dampier Authority (2006) 33 WAR 82; [2006] WASC 281

Barnes v Forty Two International Pty Ltd (2014) 316 ALR 408; [2014] FCAFC 152

Bartier Perry Pty Ltd v Paltos [2021] NSWCA 158

Brambles Holdings v Carey (1976) 15 SASR 270

Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54

Computer Edge v Apple Computer (1986) 161 CLR 171; [1986] HCA 19

Crouchman v Hill [1947] 1 All ER 103

Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1; [2016] HCA 26

Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31

EW Blanch Pty Ltd v Cooper [2005] NSWCA 217

Fink v Fink (1946) 74 CLR 127; [1946] HCA 54

Finnegan v Allen [1943] KB 425

Futuretronics International Pty Ltd v Gadzhis (1992) 2 VR 217

Galati v Deans [2019] NSWSC 1548

Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82

Gould v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490; [1916] HCA 81

Gould v Vaggelas (1984) 157 CLR 215; [1984] HCA 68

GR Capital Group Pty Ltd v Xinfeng Australia International Investment Pty Ltd [2020] NSWCA 266

Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 at 574

Harvard Nominees Pty Ltd v Tiller [2020] FCA 604

Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1988) 39 FCR 546

Henville v Walker (2001) 206 CLR 459; [2001] HCA 52

Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54

Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10

Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206

Jams 2 Pty Ltd v Stubbings (No 3) [2019] VSC 150

Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526

Jones v Daniel [1894] 2 Ch 332

Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8

Joslyn v Berryman (2003) 214 CLR 552; [2003] HCA 34

JR Consulting & Drafting Pty Ltd v Cummings (2016) 329 ALR 625; [2016] FCAFC 20

JWH Group Pty Ltd v Kimpura Pty Ltd (2004) 61 IPR 295; [2004] WASC 39

Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4

Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68

Lee v Westpac Banking Corporation (No 2) [2016] FCA 901

Lifehealthcare Distribution Pty Ltd v Nicholas [2011] NSWSC 661

Macquarie Bank Ltd v Arup Pty Ltd [2016] FCAFC 117

McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230; [2008] FCAFC 2

McMillan v Coolah Home Base (No 3) [2020] NSWSC 1325

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377; [1951] HCA 79

Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd [2020] NSWCA 234

Merewether v Scottish Australian Mining Co Ltd (1907) 4 CLR 953; [1907] HCA 8

Mistrina v Australian Consulting Engineers [2020] NSWCA 223

Mitchell Morgan Nominees Pty Ltd v Vella [2011] NSWCA 390

Nintendo Co Ltd v Centronics Systems Pty Ltd (No 2) (1994) 181 CLR 134; [1994] HCA 27

Oscar Chess Ltd v Williams [1957] 1 All ER 325

Palmer Street Developments Pty Limited v J & E Vanjak Pty Ltd [2018] QCA 111

Perestrello e Companhia Limitada v United Paint Co Ltd [1969] 3 All ER 479

Phoenix Commercial Enterprises v City of Canada Bay Council [2010] NSWCA 64

Pilmer v The Duke Group Ltd (2001) 207 CLR 165; [2001] HCA 31

Potts v Miller (1940) 54 CLR 282; [1940] HCA 43

Precision Pools Pty Ltd v Federal Commissioner of Taxation (1992) 37 FCR 554; [1992] FCA 746

RCR Energy Pty Ltd v WTE Co-Generation Pty Ltd [2017] VSCA 50

Reinhold v New South Wales Lotteries Corp (No 2) (2008) 82 NSWLR 762; [2008] NSWLR 187

Robinson v 470 St Kilda Road Pty Ltd (2018) 263 FCR 572; [2018] FCAFC 84

SPAR Licensing Pty Ltd v MIS QLD Pty Ltd (2014) 314 ALR 35; [2014] FCAFC 50

Standard Chartered Bank v Pakistan National Shipping Corporation [No 2] [2003] 1 AC 959

Street v Luna Park Sydney Pty Ltd [2007] NSWSC 588

Summergreene v Parker (1950) 80 CLR 304; [1950] HCA 13

Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] 2 AII ER 127

The Grain Pool of Western Australia v The Commonwealth (2000) 202 CLR 479; [2000] HCA 14

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52

Tonitto v Bassal (1992) 28 NSWLR 564

Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333

Vincent v Premo Enterprises (Voucher Sales) Ltd [1969] 2 QB 609; [1969] 2 All ER 941

Vines v Australian Securities and Investments Commission (2007) 73 NSWLR 451; [2007] NSWCA 75

W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572; [1906] HCA 79

Williams v Pisano (2015) 90 NSWLR 342; [2015] NSWCA 177

Wyzenbeek v Australasian Marine Imports Pty Ltd (in Liq) (2019) 272 FCR 373; [2019] FCAFC 167

Xu v Lindsay Bennelong Developments Pty Ltd [2020] NSWSC 1692

Texts Cited:

Heydon, Heydon on Contract: The General Part (Thomson Reuters, 2019)

Category:

Principal judgment

Parties:

2018/00245168
Stav Investments Pty Ltd atf the Stav Investments Family Trust (First Plaintiff)
Scott Stavretis (Second Plaintiff)
Andrew George Taylor (First Defendant)
John Thomas Charles Wilkinson (Second Defendant)

2019/00376795
LK Group Investments Pty Ltd (Plaintiff)
Andrew George Taylor (First Defendant)
John Thomas Charles Wilkinson (Second Defendant)

Representation:

Counsel:
AC Casselden SC with TE O’Brien (Plaintiffs)
H Somerville with D Meyerowitz-Katz (Defendants)

Solicitors:
Marque Lawyers Pty Ltd (Plaintiffs)
TPS & Co Lawyers (Defendants)

File Number(s):

2018/00245168; 2019/00376795

Publication restriction:

Nil

Judgment

1. HER HONOUR: In this matter, two sets of proceedings were heard together. The first (the Stav Proceeding) (2018/245168) was commenced by Stav Investments Pty Ltd (Stav Investments) by statement of claim filed on 9 August 2018 in the general list in the Equity Division (the matter being subsequently transferred to the Commercial List). The second (the LK Proceeding) (2019/376795) was commenced by LK Group Investments Pty Ltd (LK Group Investments) by summons and commercial list statement in the Commercial List on 29 November 2019 (with an amended summons being filed on 5 December 2019).

2. In both proceedings, claims are made for damages for breach of contractual warranties and for damages, pursuant to s 236 of the Australian Consumer Law being Schedule 2 to the Competition and Consumer Act 2010 (Cth) (Competition and Consumer Act) (Federal ACL) or the Australian Consumer Law (NSW) (ACL NSW) (being a reference to the operation of s 28(1)(b) of the Fair Trading Act 1987 (NSW)) , s 1041I of the Corporations Act 2001 (Cth) (Corporations Act), or s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) for misleading or deceptive conduct, in relation to the purchase of shares in Yatango Mobile Pty Ltd (Yatango Mobile), a company now in liquidation.

3. The claims brought by Stav Investments and LK Group Investments are brought (or now brought) by each, respectively, expressly in its capacity as trustee (in the case of Stav Investments, for the Stav Investments Family Trust; in the case of LK Group Investments, for the Kestelman Investments Family Trust).

4. The second plaintiff in the Stav Proceeding is Mr Scott Stavretis, the principal of Stav Investments. Mr Stavretis was granted leave to be joined as a plaintiff in the Stav Proceeding by order of Stevenson J made on 3 August 2020. Following the joinder of Mr Stavretis as second plaintiff in the Stav Proceeding, in accordance with the orders made by Stevenson J, a second further amended commercial list statement was filed on 3 August 2020. In the course of submissions, issue was taken by the defendants that no amended statement of claim or summons was filed following the transfer of the Stav Proceeding to the Commercial List and joinder of Mr Stavretis and hence they maintain that the relief claimed (by Stav Investments) remains as set out in the initial statement of claim – and that Mr Stavretis has not made any claim for relief in the Stav Proceeding. (This is not the last of the technical pleading points taken by the defendants in the course of the respective proceedings – as I explain later in these reasons.) The plaintiffs in the Stav Proceeding, in response to this complaint, point to the orders made by Stevenson J at the time that Mr Stavretis was joined to the proceeding and maintain that it is clear that Mr Stavretis is seeking relief in his own right in addition to the relief sought by Stav Investments (see T 403.40-50, 404.1-9). I consider this and other arguments in relation to the way in which the claims have been brought in due course below.

5. In the LK Proceeding, the claims made are set out in the amended summons filed on 5 December 2019 and a second further amended commercial list statement filed on 11 August 2020.

6. The defendants in both sets of proceedings are Mr Andrew Taylor and Mr John Wilkinson, the officers and shareholders of Yatango Mobile at the relevant time, each of whom personally gave contractual warranties in respect of the purchase of shares in Yatango Mobile and each of whom is alleged to have made certain representations in connection with the purchase. The defendants filed further amended commercial list responses in both matters on 17 September 2021. Apart from the limitation defences raised by the defendants, the defendants maintain that the plaintiffs have not established liability; nor have they established causation or loss; and that, if the plaintiffs’ claims otherwise succeed, then their liability should be reduced by reason of the plaintiffs’ alleged contributory negligence and, further, that their liability should be proportionate to the liability of various alleged concurrent wrongdoers. Neither of the defendants himself gave evidence in the proceedings.

Overview of claims

7. Broadly speaking, by way of overview, before Yatango Mobile went into liquidation in 2015, it was an online reseller of mobile phone plans. A subsidiary of Yatango Mobile, Yatango Mobile (Australia) Pty Ltd (YMA) had an agreement with Optus pursuant to which Optus provided wholesale mobile telecommunications services to YMA, which YMA would then on-sell to retail investors. Sales were made principally through an online platform (promoted, at least to the plaintiffs, as being unique) which enabled users to customise their mobile phone plans (and was marketed to users through social media and word of mouth). The first defendant, Mr Taylor, was the founder, director and Chief Executive Officer of Yatango Mobile. The second defendant, Mr Wilkinson, was the Chief Financial Officer and company secretary of Yatango Mobile.

8. In 2013, Mr Stavretis and Mr Larry Kestelman (the latter being the principal of LK Group Investments), who were business associates and had been involved in various successful businesses together in the past, were approached to invest in Yatango Mobile’s business. Mr Stavretis and Mr Kestelman say that various representations were made to them about the Yatango Mobile business and, in particular, about the ownership of the intellectual property associated with the online platform used in Yatango Mobile’s business, on which it is said reliance was placed by them when the decision was made to invest (through the corporate entities then established) in the business.

9. In late 2013, the corporate plaintiffs were incorporated and entered into share sale agreements (in the form of signed Terms Sheets) with Yatango Mobile, Mr Taylor and Mr Wilkinson, pursuant to which each of the corporate plaintiffs agreed to purchase shares in Yatango Mobile (in consideration of the payment of a sum of $750,000 by each of the two purchasers). There is a dispute as to the actual date that the parties entered into the 2013 share sale agreements (which were dated 28 November 2013). This is relevant having regard to a limitations defence by the defendants in relation to the claim by LK Group Investments.

10. In 2014, the corporate plaintiffs each invested a further $262,500 in Yatango Mobile, acquiring further shares under a second set of sale agreements again in the form of signed Terms Sheets.

11. Under the respective agreements, relevantly, in addition to warranties given by Yatango Mobile, each of Mr Taylor and Mr Wilkinson gave personal warranties as to particular matters, including (as adverted to above) as to the ownership of the intellectual property used in Yatango Mobile’s business. The complaint by the plaintiffs is as to breaches of various of those warranties. The matters the subject of those warranties also form part of the claim for damages for misleading or deceptive conduct under the consumer legislation referred to above.

12. The defendants, among other things, point to ambiguity in the term “intellectual property” and as to what was meant by the “code” used in Yatango Mobile’s business or developed by Yatango Mobile. They deny breach of the contractual warranties (for various reasons) and deny the making of the alleged representations and that there was reliance on the alleged representations (assuming any such representations were made). The defendants also contend that the plaintiffs have not established any loss.

13. On 20 October 2015, Yatango Mobile was placed in external administration and by 24 November 2015 Yatango Mobile was in liquidation.

14. The plaintiffs’ claims in the respective proceedings to a large extent mirror each other (although there are some relevant differences).

15. The claims for breach of contract are, as adverted to above, claims for breach of various of the contractual warranties. The corporate plaintiffs maintain that they are entitled to recover substantial damages to place them in the position in which they would have been had the contractual warranties not been breached. It is said that they are entitled to recover the amount paid by them and they say that, under the respective share sale agreements, the parties agreed that Yatango Mobile, and the shares purchased, had a particular value (that value having been agreed on the basis that the contractual warranties given by the defendants were true) whereas the shares acquired, in circumstances where the warranties were false, are valueless. The defendants vehemently complain against any such allegation (i.e., as to the shares being valued as worthless) being entertained, on the basis that the fact of Yatango Mobile’s liquidation was not pleaded nor were the consequences of that liquidation in respect of the value of the shares. The defendants say that because the fact of liquidation has not been pleaded the defendants cannot claim any loss by reference to the fact that the company has gone into liquidation (see for example at T 358.14-20).

16. The limitation defence to various of the contractual and misleading or deceptive conduct claims advanced by LK Group Investments is based on the contention that the 2013 contract was entered into on 28 November 2013 and that, given that the LK Proceeding was commenced on 29 November 2019, claims for breach were time barred by force of s 14 of the Limitation Act 1969 (NSW).

17. As to the claims for misleading or deceptive conduct, the corporate plaintiffs’ case is advanced by them as a “no transaction” case, namely that certain misleading or deceptive representations were made and relied upon by the plaintiffs in entering into the share sale agreements in circumstances where, but for those representations, the investments would not have been made.

18. The principal representations about which complaint is made are as follows.

19. First, what are referred to as the “Ownership Representations”, in essence that the intellectual property used by Yatango Mobile in relation to the operation of its business was owned by, licensed to or controlled by Yatango Mobile.

20. Second, what are referred to as the “YM Asset Representations”, in respect of the first investments made in 2013, namely that the value of Yatango Mobile’s assets was as recorded in a consolidated group balance sheet provided to the plaintiffs on 17 September 2013 (which included the assets of YMA despite it being wholly owned by Mr Taylor).

21. Third, what is referred to as the “Valuation Representation”, in respect of the first investments made in 2013, namely that Yatango Mobile was valued at $15 million, before the capital investments made by the corporate plaintiffs, and $16.5 million after it.

22. Fourth, what is referred to as the “Roll-Up Representation”, made in respect of the second investments made in 2014, namely that the corporate plaintiffs’ shares in Yatango Mobile would be exchanged for shares in a new holding company.

7. The plaintiffs contend that the defendants made these representations as principals (given that they were made in the context of the defendants giving personal warranties) but, in the alternative, it is contended that the defendants were knowingly involved in the giving of those representations by Yatango Mobile (and this is the basis of the alternative accessorial liability claims made against the defendants).

Chronology of events

Incorporation of Yatango entities in 2012

24. In August 2012, Mr Taylor established the “Yatango” business. On 2 August 2012, the following companies were incorporated: Yatango Mobile; Yatango Pty Ltd (Yatango) (a holding company subsequently re-named Yatango Holdings Pty Ltd) (Yatango Holdings). On 9 June 2012, YMA was incorporated. On 11 June 2013, Yatango Labs (Australia) Pty Ltd was incorporated, and on 1 May 2015 Yatango Mobile Labs Pty Ltd was incorporated. (Collectively, the Yatango Mobile Group.) As noted above, Mr Taylor was appointed as a director of Yatango Mobile and Mr Wilkinson its company secretary. Yatango (subsequently re-named Yatango Holdings) was at all times owned by Mr Taylor and companies associated or controlled by him (The Digital Bakery Ltd and Telcovision Pty Ltd). Mr Taylor owned all of the issued shares in YMA (until early 2015).

ECConnect Proposal signed 14 August 2012

25. On or about 14 August 2012, Mr Taylor signed a proposal (referred to as the ECConnect Proposal) dated 27 June 2012 put forward by an entity associated with Mr Bradley Apps, a software developer.

26. The ECConnect Proposal related to a generic system (ECSuite) that Mr Apps’ company (Appscorp trading as ECConnect) had developed and provided to five other telecommunications companies, three of which used the billing system “module” (see T 223.20-45). The billing system was originally “built” in about 2004 for an entity called Startel (see T 223.50, 224.1-11).

27. Mr Apps’ evidence was that other customers of ECConnect used systems which “started from the one base code base and then were customised to suit their requirements”. Mr Apps said that the base billing system used was the same for every customer; but that the difference for Yatango Mobile (from those other customers) was that it “wanted to go to the market with different types of plans so that billing system would have been customised to suit them”.

28. The ECConnect Proposal referred to ECSuite as a “tried and trusted system”:

ECSuite is a fully customizable [sic] web based application which incorporates all of our software modules providing the backbone and features needed to run a telecommunications company. The systems wilI be customized [sic] to suit your needs and provided for self hosting [sic] or fully hosted in our secure, redundant data center in Brisbane.

29. As to the Customised Code, the defendants say that Mr Apps agreed that what ECConnect did was effectively to “plug” the billing system into Yatango Mobile’s platform and that it then became “all one platform”. It is noted that Mr Apps said that ECConnect’s customers “would have this base code and it would get customised to suit them”, and it is said that what was done for Yatango in this regard was very similar to what was done for a customer called Amaysim, a competitor of Yatango.

30. Mr Apps gave evidence that the product referred to in the 27 June 2012 ECConnect Proposal as “ECPortal” was “classed as Customised Code because it didn’t exist at the time of this proposal”, and that Yatango Mobile was the first customer for which ECConnect had built such a product. The defendants say that ECPortal was built by ECConnect in accordance with a design supplied by Yatango Mobile. Mr Apps’ evidence was that ECConnect had two employees who “were dedicated employees for Yatango working from their office”; and identified Daniel Badger and Joseph Nwokolo as those employees. Mr Apps agreed that, while the billing system was being developed, his employees were working with Yatango Mobile’s employees in developing the platform.

Optus key carrier agreement

31. On 24 August 2012, YMA entered into a key carrier agreement with Optus Networks Pty Limited (Optus), pursuant to which Optus provided wholesale mobile telecommunications services to YMA, which YMA could on-sell to retail customers.

2012 BJYP Agreement

32. The ECConnect Proposal was effectively superseded in about September 2012, when Yatango Mobile entered into an Intellectual Property Transfer Agreement (the 2012 BJYP Agreement) with another company associated with Mr Apps (BJYP Pty Ltd, to which I refer as BJYP). In essence, the 2012 BJYP Agreement provided for the transfer and licensing of a “Code” and “Customised Code” for a billing system which the plaintiffs say was central to the operation of Yatango Mobile’s business.

33. Pursuant to cl 1.1 of the 2012 BJYP Agreement, Yatango Mobile was to establish a new entity (Yatango Mobile Labs) on or about the date the last party signed the agreement. Pursuant to cl 1.2 of the 2012 BJYP Agreement, the business of Yatango Mobile Labs was to consist of acquiring a copy of the Base Code from BJYP and then licensing the Code and Customised Code to Yatango Mobile and its subsidiaries. Pursuant to cl 2, Yatango Mobile was to hold 80% of the shares in Yatango Mobile Labs, and BJYP was to hold 20%.

34. Pursuant to cl 1.3 of the 2012 BJYP Agreement, BJYP agreed to transfer to Yatango Mobile Labs “a copy of the Intellectual Property”. The term “Intellectual Property” was defined as “all intellectual property used in the Code”. The term “Code” was in turn defined as “version 1 of the EC source code base, the specification for which is set out in Schedule 1 to this agreement”. (Mr Apps’ evidence is that this is what was later referred to as the “Base Code”. The defendants say, however, that there is an open question as to whether Mr Apps’ evidence as to the building of Base Code is a reference to the “platform” referred to in the email communications referred to below.)

35. Clause 1.4 of the 2012 BJYP Agreement provided that Yatango Mobile Labs would, at its cost, engage ECConnect to provide services to customise and develop the Intellectual Property to the requirements of Yatango Mobile Labs for an (unspecified) period of time, which services were said to be “described more fully in the ECConnect Agreement”.

36. The reference to the “ECConnect Agreement” was to a document headed “Appscorp Customer Order Form for Software and Services”, which was dated 10 September 2012 and signed by Mr Taylor on behalf of Yatango Mobile on or about 29 September 2012. It provided for Appscorp to supply and install certain software (the defendants say that this was apparently the ECConnect billing, provisioning, and customer management systems), and to provide support services with respect to that software. There was also provision for out of scope services charged at an hourly rate.

37. The defendants say that the 2012 BJYP Agreement said nothing about the customisation and development of intellectual property. However, the 2012 BJYP Agreement at least contemplated some customisation as per the definition of Developed Materials (see below). Moreover, it clearly provided for the (yet to be incorporated) entity (Yatango Mobile Labs) to engage ECConnect to customise and develop intellectual property.

38. As adverted to above, the 2012 BJYP Agreement included a defined term “Developed Materials”, that being:

the Intellectual Property including all material, documents, equipment, information and data (however stored), wholly and solely created, developed, customised or implemented under the ECConnect Agreement or for the purposes of the venture between the parties.

39. Clause 5.1 of the 2012 BJYP Agreement provided (inter alia) that all Intellectual Property Rights in the Developed Materials, excluding certain things, vested in Yatango Mobile Labs.

40. The defendants place emphasis on cl 5.5 of the 2012 BJYP Agreement in that it provided that, in the event that the company (Yatango Mobile Labs) experienced an Insolvency Event, defined to include voluntary administration or liquidation, the Intellectual Property the subject of the agreement would revert to the originator (therefore the defendants say that it would not then have been property available for distribution in the event of the liquidation of the company to which it was to be assigned under this agreement) (see T 31.28-50).

41. The relevance the defendants ascribe to this seems to be as going to the ultimate question of loss – i.e., if, on a liquidation of the (then only contemplated) Yatango Mobile subsidiary that was to hold the intellectual property, ownership of the intellectual property reverted to the originator of the intellectual property then that might have an effect on the value of the shares in Yatango Mobile that were being acquired (see, in due course, the evidence of the forensic accounting expert, Mr Potter, as to the implications of there not being an absolute entitlement to the intellectual property on which the use of the online platform was based). However, it may be (and I must say that I found the submissions on this not altogether clear) that the defendants are also placing reliance on this clause as going to the question of any reliance on a warranty as to the ownership of the intellectual property (insofar as the 2012 BJYP Agreement was provided to Mr Stavretis prior to the acquisition of shares in Yatango Mobile and he was thereby on notice of this provision). (I add here that there is no suggestion that this clause was in any way drawn to Mr Stavretis’ attention; and it seems to me unlikely, from the tenor of his evidence in the witness box, that Mr Stavretis would have noted or paid attention to the import of this particular clause even if he did have regard to the agreement itself.)

42. Insofar as the 2012 BJYP Agreement provided for Yatango Mobile to create a new subsidiary called Yatango Mobile Labs and provided for it to transfer not less than 20% of Yatango Mobile Labs to BJYP in exchange for the development, transfer and licensing of code, the plaintiffs say that those agreements were never performed and that the code was never transferred to Yatango Mobile Labs (a company which did not exist at the time) or to Yatango Mobile. (Further, at T 9.48-50, the plaintiffs say that the agreement in relation to intellectual property did not include Base Code and that, at best, there was a mere licence to use the code.)

43. The plaintiffs relied in support of their case on an affidavit affirmed on 16 April 2019 by Mr Bradley Apps, in which he deposes that his company Appscorp Pty Ltd (Appscorp), trading as ECConnect, had the “base code” which could be used to base a billing system, i.e., the intellectual property for a billing and provisioning system. The plaintiffs maintain that the 2012 BJYP Agreement provided that Yatango Mobile Labs would engage Appscorp to customise software for Yatango Mobile.

44. Pausing here, it is clear that the 2012 BJYP Agreement is premised on BJYP owning the “Code” (which Mr Apps says meant “Base Code” and which was so defined in the 2014 BJYP Agreement) and all “intellectual property used in the code”, since this is what BJYP was there promising to transfer to the (then yet to be incorporated) Yatango Mobile Labs. I say this because there is more than a flavour of artificiality about the position here adopted by the defendants (see their submissions in due course) as to the difficulties for the plaintiffs in the definition of intellectual property as contained in the contractual warranties.

45. Viewed perhaps simplistically, what the defendants marketed (as having a considerable value) was a business with an unique online platform; and that the online platform used or was based on software that comprised the customisation of a particular Base Code. It may well be that none of the individuals who is a party to this proceeding understood precisely how that software or Customised Code worked in a technical way or what intellectual property was comprised in it. However, it is abundantly clear that the defendants were promoting the Yatango Mobile business as one that had the benefit of the intellectual property used in that online platform (and substantial value was certainly attributed to the billing system software in the consolidated balance sheet provided to the plaintiffs in connection with the proposed investment). For it now to be suggested that it had no value (or that warranties as to the intellectual property used in the business have no practical content) would be surprising to say the least – yet that was the flavour of the arguments here put by the defendants.

Yatango trademarks and domain names

46. In October 2012, Mr Taylor registered two Yatango trademarks in the name of Yatango Holdings. The domain names for the websites used by Yatango Mobile (yatango.com.au; yatango.com; yatangomobile.com.au; and yatangomobile.com) were registered in the name of The Digital Bakery (Australia) Trust. It is said by the plaintiffs that the Yatango business also used a passport and reward system and customer management system, the intellectual property in that software being owned by Yatango Holdings and Yatango Mobile (though the defendants maintain that there is no evidence of this).

Marketing of Yatango Mobile business

47. On 31 January 2013, Yatango Mobile (which was described, in a document headed “Yatango Mobile Investor Overview”, as an “SIM only, cloud based social Telco platform that allows people to customize their own mobile plan and pay for what they need, delivering true personalisation – harnessing the power of the social graph, modulated billing and big data analytics”) went “live”. From that time, Yatango Mobile operated a consumer marketing website, web and mobile applications and an e-connect billing and provisioning system. (Therefore, by 31 January 2013 there must have been some form of Customised Code in order to have permitted the website to go “live” even if it was still the subject of further or ongoing development, because the defendants were marketing it as such.)

48. In its marketing materials, Yatango Mobile marketed itself as having two points of difference compared with other like companies: first, that it used social media and online technology to acquire customers at a relatively low cost; and, second, that it permitted customers to “customise” their mobile plans, in that they could select the amount of data, the number of text messages, and the time spent making phone calls that they would pay for each month, thus allowing them to pay for the services they actually used.

Approach to Mr Stavretis and Mr Kestelman to invest in Yatango Mobile

49. In late August 2013, Mr Stavretis (who, as did Mr Kestelman, had significant experience in the mobile telecommunications industry at the time) was approached by Mr Ryan O’Hare (a former business associate of Mr Stavretis) as to the possibility of investment by Mr Stavretis and Mr Kestelman in Yatango Mobile. It appears that the defendants were looking to raise capital for the Yatango Mobile business at the time.

Initial meeting on 28 August 2013

50. On 28 August 2013, there was a meeting between Mr Stavretis, Mr O’Hare, Mr Kestelman and Mr Taylor. The evidence of Mr Stavretis and Mr Kestelman is to the effect that, at the meeting, Mr Stavretis asked who owned the online platform and “IP” (which was described in the marketing material, as noted above, as the differentiator for Yatango Mobile from other companies). The plaintiffs say that they had concerns about the ownership of the “IP”, which was a matter relevant to their decision to invest, and that it was in that context that the defendants gave the contractual warranties on which the plaintiffs here rely.

51. The defendants say that there is no explanation as to how Mr Stavretis knew, as at 28 August 2013 (when he says that he asked about the ownership of Yatango’s trade marks and was assured by Mr Taylor that they were owned by Yatango Mobile), that there were registered trade marks used by Yatango Mobile. It seems to me that this criticism misses the point. Mr Stavretis may have had no actual knowledge one way or the other as to whether there were registered documents used in the Yatango Mobile business; he may simply have assumed this. The significance of his evidence to my mind is that it reveals that, as at the initial meeting, enquiry was being made as to the ownership of intellectual property or IP used in the Yatango Mobile business; which supports the plaintiffs’ submission that they had concerns about the matter and made those concerns known to the defendants.

52. The defendants further say that Mr Stavretis’ evidence in his first affidavit that, during the initial 28 August 2013 meeting, Mr Taylor said that the company was valued at $15 million conflicts with contemporaneous documents (referring to the 30 September 2013 email to Mr O’Hare and the 7 October 2013 email from Mr Stavretis to Mr Kestelman (as to which, see below) which the defendants say calls into question the account given by Mr Stavretis of the 28 August 2013 meeting). The defendants say that it is highly unlikely that at the initial 28 August 2013 meeting Mr Taylor said that the valuation was $15 million, rather than $45 million (which is the figure given in the contemporaneous documents). (The defendants further say that the pleaded representation as to the value of the company was not made even on Mr Stavretis’ own account of events; alternatively, it is submitted in effect that Mr Stavretis’ evidence of the way the conversation occurred should not be accepted.)

53. Mr Kestelman’s evidence is that, after the meeting on 28 August 2013, he left it to Mr Stavretis to be the primary point of contact with the defendants. That is consistent with the contemporaneous documents.

Further meeting on 2 September

54. On 2 September 2013, Mr Stavretis had a further meeting with Mr Wilkinson and Mr Taylor in Sydney as to a potential investment in the Yatango business.

55. On 3 September 2013, Mr Taylor sent an email to Mr Stavretis, referring to the 2 September 2013 meeting and the potential investment in Yatango. Mr Taylor said that he was “happy to extend you the following terms at a 20% discount on the advertised rate in order to secure your involvement and limit the number of additional new shareholders”, below which appeared two bullet points which provided “[i]nvestment = US$5m” and “[s]hare of company = 11.1%”. At the conclusion of this email, Mr Taylor stated that “[o]ntop of this, we would also like to secure a variable arrangement with your Manila based Service centre, on favourable terms to help us scale our operational coverage internationally”.

56. Pausing here, it is accepted that this is a reference to a company with which Mr Stavretis and Mr Kestelman were associated, Acquire Client Services Pty Ltd (Acquire), which provided call centre services principally from Manila. Thus, it appears from this communication that it was Yatango Mobile which raised the suggestion that it engage the services of Acquire in Manila to assist in its operations (and did not suggest that it was a term of the offer there being made). (I note that the defendants plead that Mr Stavretis and Mr Kestelman are concurrent wrongdoers in that they breached their duties to the respective corporate plaintiffs by having, as a “condition precedent” to their investment in Yatango Mobile, that Acquire be engaged to provide services to YMA.)

“Acquire” proposal

57. On 8 September 2013, Mr Stavretis sent an email to the defendants attaching a proposal by Acquire Asia Pacific to provide contact centre services to Yatango Mobile. The plaintiffs say that this was independent of anything to do with the Yatango Mobile investment opportunity and was in response to Mr Taylor’s request to secure an arrangement with Acquire.

Provision of corporate structure and financial information

58. On 17 September 2013, Mr Stavretis received an email from Mr Wilkinson, copied to Mr Taylor, in which Mr Wilkinson responded to queries that had been raised by Mr Stavretis (inserting in the response a number of Dropbox links and text). Mr Stavretis was provided with copies of various documents, including, relevantly, the 2012 BJYP Agreement (from which the defendants contend he was on notice of the position as to licensing or ownership of the software).

58. With respect to a request from Mr Stavretis for information in relation to the company structure, Mr Wilkinson provided a drop link box with a corporate structure diagram (that incorrectly showed that Yatango Mobile owned 100% of YMA); as to the query about financials, a balance sheet for the Yatango Mobile Group was attached (consolidating the assets of Yatango Mobile, YMA and other entities). Similarly, a financial forecast plan was attached. As to the item “business summary”, this was said “to be advised” and, similarly, the item commercial arrangements was met with “TBA”. There was a Dropbox link in response to the request for key commercial agreements. There was also a request for information on the “platform”. In response to the query for “Details of intellectual property” there was another Dropbox link.

59. The plaintiffs say that the consolidated balance sheet is significant in that it shows the Yatango Mobile Group (though YMA was not a wholly or majority owned subsidiary) with net assets of about $9.5 million, including the principal asset as billing software (i.e., “Fixed Assets Software Development – Billing System: $12,312,733”). The balance sheet thus shows a software development billing system (at a value of $12.3 million) as being a principal asset of some (not identified) entity within the consolidated Yatango Mobile Group. The plaintiffs complain that Yatango Mobile never acquired ownership or a licence for that billing and provisioning system.

60. The defendants are adamant (by reference, among other things, to Mr Apps’ evidence) that Yatango Mobile did indeed have a licence to use the relevant software for the billing and provisioning system (though I note that there is conceptually a material difference between ownership of something and the benefit of a licence to use that thing – and see Mr Potter’s evidence in relation to this in due course).

Negotiations as to the “value” of Yatango Mobile

62. On 30 September 2013, Mr Stavretis exchanged emails with Mr O’Hare regarding Yatango Mobile’s valuation of its shares. In his 30 September 2013 email, Mr Stavretis said to Mr O’Hare that:

… Andy [Taylor] had a valuation of $45m or so in mind which for 15,000 customers (most on a free trial) and a very unproven organic sales model (taking out Kogan) its just way over valued. He mentioned he would put something forward on a lower val however I just don’t think we will get there.

…

I did have a very quick look at some the [due diligence] material they sent through and quickly see there are some risks in the business with the main risk is the IP is not controlled by them which can lead to any input cost for licensing the IP of the platform and the other director works for their competitor. …

63. The defendant says that this reveals the real concern that Mr Stavretis had about the “software issue” – i.e., that it was a concern about licensing cost – but ultimately it does not seem to me to matter (unless it goes to the question of reliance) why Mr Stavretis had a concern; rather, the significant point is that there was such a concern being raised in the contemporaneous communication with Mr O’Hare, which is consistent with Mr Stavretis’ recollection that he raised the ownership issue in the initial meeting.

64. As to the 30 September 2013 email, the defendants say that this shows both that Mr Stavretis was not taking Mr Taylor’s valuation at face value, and that he proposed to satisfy himself as to the value of the company (and that the $15 million valuation had not yet been mentioned at the time the email was sent, noting that Mr O’Hare’s response in an email dated 30 September 2013 suggested that a valuation of $20 million could be supported). The defendants further attach importance to this email because they say (as adverted to above) that it is a contemporaneous record of Mr Stavretis’ concern in relation to the intellectual property (namely, that if it was not owned by Yatango Mobile then there could be an increase in costs because they would have to pay for a licence). Complaint is made that while (in cross-examination) Mr Stavretis said that control was only one element of his concerns, the other “elements” have neither been identified nor explained by Mr Stavretis.

65. On 7 October 2013, Mr Stavretis sent an email to Mr Kestelman in which he stated that “[t]he valuation they started with was over $45m. They want us on board and I have now got the offer down to a $15m valuation” (which, as the defendants say, suggests that the $15 million valuation was first negotiated at some point between 30 September 2013 and 7 October 2013).

66. The 7 October 2013 email also refers to “two issues that I have with their business, a software licensing issue with their platform that they need to addressed [sic] and some company structuring needs to be sorted (trying to get the IP to stay in Oz rather than Singapore)”. The defendants say that, in context, the “software licensing issue” to which reference is there made is obviously a reference to the issue Mr Stavretis had raised with Mr O’Hare in the 30 September 2013 email, being Mr Stavretis’ concern regarding input costs. As to Acquire, the email said “I’m still going with them on the call center [sic] side which they are holding back on presumably as bait for the investment”.

67. The response to this from Mr Kestelman, in an email dated 7 October 2013, was that “I think if you think its [sic] a good idea I would want to be sold on why as I’m not dying to invest in a telco start-up”.

68. As to the 7 October 2013 email from Mr Stavretis to Mr Kestelman, the defendants say that Mr Stavretis does not explain in terms the concern in relation to the software licensing to which he there referred or what gave rise to that concern. The defendants say that this may (although it is not clear) have related to Mr Stavretis’ review of the 2012 BJYP Agreement (which was provided in a Dropbox link contained in the 17 September 2013 email from Mr Wilkinson). Insofar as the plaintiffs plead the 2012 BJYP Agreement as a particular of the “First Pre-Contract IP Rights Representations”, the defendants submit that not only was the pleaded representation not made in that document but also that the provision of the document is consistent with the defendants being transparent as to the true position.

69. On 14 October 2013, Mr Stavretis sent an email to Mr Taylor, stating that:

…

The company is being offered at a valuation of $15m, which is a substantial amount for a business that’s not making money and has very low revenue. The investment and [sic] I understand from our initial meeting is based around the platform and from what I understand from your initial pitch is your platform together with your model has some sort of uniqueness around how you acquire clients at a lower cost than others due to the way you acquire clients through social media and the worth [sic] of mouth that brings to acquire others. I believe you mentioned that for every 1 of your clients they are bringing on 4 clients.

…

To substantiate a valuation near $15m I would need to see solid proof of this - or some other reason on why the Platform or the model is so uniquely different to all the others out there (we all know most MVNO’s [Mobile Virtual Network Operators] here and OS [overseas] fail).

[Emphasis in original]

70. Pausing here, Mr Taylor did not respond to this email to demur from the proposition that what was being pitched was the “platform” nor did he suggest that there was not some “uniqueness” about the platform or model.

71. In this regard, the defendants say that Mr Stavretis’ 14 October 2013 email to Mr Taylor, asking Mr Taylor to “substantiate” the $15 million valuation, shows that Mr Stavretis understood the value proposition to be what he referred to as “the platform” and Yatango Mobile’s social media customer acquisition model. The defendants say that this indicates that Mr Stavretis was thinking carefully about the valuation and how much he was willing to invest; and that he was conducting his own enquiries as to value (rather than taking Mr Taylor at his word).

72. On 15 October 2013, Mr Stavretis had a telephone conversation with Mr Taylor and Mr Wilkinson in relation to Yatango Mobile (see Mr Stavretis’ first affidavit affirmed on 23 April 2019 at [25]; see also affidavit of Mr Taylor sworn 10 September 2019 at [117] in which Mr Taylor denies that a conversation to that effect took place). Mr Stavretis deposed that Mr Taylor said words to the following effect in the course of the conversation: “[T]he IP will be sorted, and Yatango will own it. We’re already in the process of sorting this out and we will have assurances in the form of warranties in the term sheet that reflect that Yatango owns the IP”. On the same day, Mr Stavretis sent a spreadsheet to Mr Kestelman with forecast customer acquisitions for Yatango Mobile. (The defendants say that there is no evidence as to when Mr Stavretis received this spreadsheet or what he made of it, but that it shows the diligence with which Mr Stavretis was investigating the proposed investment.)

73. Mr Stavretis’ email of 17 October 2013 included the statement that:

The DD revealed two issues that I have with their business, a software licensing issue with their platform that they need to addressed [sic] and some company structuring needs to be sorted (trying to get the IP to stay in Oz rather than Singapore).

74. In Mr Kestelman’s email to Mr Stavretis, on 17 October 2013 Mr Kestelman stated that “[u]nless you can see huge potential in the software and the model its [sic] just another telco. Right now I am not sold”. (Thus, it is clear that Mr Kestelman was focusing on the “software” and the “model”.)

Corporate structure

75. On 21 October 2013 at 9.43 am, Mr Stavretis requested from Mr Wilkinson “an updated corporate structure on how it will look”. In response, at 10.24 am, Mr Wilkinson forwarded to Mr Stavretis an advice that Mr Taylor and Mr Wilkinson had received from Pinnacle Group on 9 October 2013 in relation to the ownership of Yatango Mobile’s intellectual property and potential tax-effective structures; and there was a further discussion regarding the proposed structures. (The defendants note that, in cross-examination, Mr Stavretis denied any recollection of that advice and also denied knowing that Yatango Mobile had received advice from Pinnacle Group –- despite having earlier given evidence that he relied on “a corporate structure sent to me from Andy Taylor … which was from an adviser called Pinnacle” prior to executing the First Contracts – see T 106.25-27.)

76. At 10.58am on 21 October 2013, Mr Taylor sent an email to Mr Stavretis, saying:

John’s working on this [i.e., in context, the corporate structure] for you now. Please note it will be subject to sign off from our Tax Advisors. But essentially we are working to a structure whereby Yatango Mobile PTY ltd [sic] owns 100% of each trading company that holds the regional wholesale agreements as well as the IP company that will receive licence income for the platform from the trading companies. The platform IP itself is owned by Yatango Mobile Lab’s [sic] which is 80% owned by Yatango Mobile PTY ltd [sic] and 20% by Brad Apps from EC Connect [sic].

77. This email in terms is conveying that there was already an entity known as Yatango Mobile Labs which owned “the platform IP”. That was not, on any view of things, the case as Yatango Mobile Labs had not yet been incorporated.

78. As to the reliance placed by the plaintiffs, as a particular of the “First Pre-Contract IP Rights Representation”, in the 21 October 2013 email from Mr Taylor to Mr Stavretis referring to Mr Wilkinson working on the “IP issue”, the defendants submit that no such representation was made in the email. The defendants say that, in context, the email is forward-looking; i.e., that it is describing a structure that is planned to be in place, not the structure that is presently in place. Moreover, the defendants rely on this as an example of what they say is Mr Stavretis’ selective memory, insofar as he recalled receiving that email but not the email sent shortly beforehand on the same day, attaching the Pinnacle advice. (Pausing here, the statement that the “platform IP itself is owned by …” is not expressed in prospective terms at all.)

79. On 25 October 2013, Mr Taylor sent an email to Mr Stavretis wanting to know “where his head was at” in relation to the investment.

80. On 30 October 2013, Mr Stavretis sent an email which made an offer of a cash investment of $1 million (saying that this would most likely be split 50/50 between “Larry and my vehicles”) at a pre-money valuation of $10 million. The email included a term for a “[l]ast right of refusal to match any future contact centre work in the Philippines”. There was reference in the email to “[w]arranties around the IP license [sic] agreement being sorted as discussed”. Mr Stavretis deposed to the discussions regarding the intellectual property licence in his first affidavit at [25] as follows. (I note that the discussion is relied on as a particular of the “First Pre-Contract IP Rights Representation”.)

Mr Stavretis:   I sent you an email yesterday asking about the IP issues. I just want to run through these with you. I am concerned about Yatango not owning the IP underlying its online platform. This IP needs to be transferred from BJYP. It’s essential that Yatango owns the underlying IP because the online platform is where the value in this company is.

Mr Taylor:    Don’t worry, the IP will be sorted, and Yatango will own it. We’re already in the process of sorting this out and we will have assurances in the form of warranties in the term sheet that reflect that Yatango owns the IP.

Mr Stavretis:    When will this be sorted out?

Mr Wilkinson:    Don’t worry, it’ll all be sorted before you sign the term sheet.

81. As to Mr Stavretis’ account of the 30 October 2013 conversation (as to warranties around the licence agreement being “sorted out”), the defendants say that this is self-serving and implausible. It is said that, at its highest, the pleaded representation was not made in that discussion; and that, at most, Mr Stavretis attributed to Mr Taylor a promise that “the IP will be sorted”.

82. On 4 November 2013, Mr Stavretis sent an email to Mr Taylor, stating:

To Increase value Would you consider something like this;

-2 year agreement with acquire

-$12 per hour

-25 agents by 1Jan

-50 agents by 1Jul

I don’t want to speak to Larry about if [sic] it’s not possible - let me know pls

83. Mr Taylor responded to the effect “50 agents+ by 1 Jul is doable, yes. On the premise you strike at the $15m val”. (This suggests a link in Mr Taylor’s mind, seemingly prompted by Mr Stavretis’ email, between the “value” at which the investment would be struck and the Acquire deal.)

84. As to the 4 November 2013 email exchange between Mr Stavretis and Mr Taylor, the defendants say that it was clearly understood by both parties that Mr Stavretis was offering to increase the agreed pre-money valuation of Yatango Mobile in return for the agreement with Acquire that was foreshadowed in the email. The defendants say that Mr Stavretis’ denial in cross-examination that this was his understanding (and his evidence that he meant something about decreasing the price in Acquire) was self-serving and implausible.

85. On 6 November 2013, Mr Stavretis made a revised offer in which the valuation had been increased to $14 million and the additional terms in relation to the Acquire agreement had been added. (Again, the defendants say that Mr Stavretis clearly saw the proposed Acquire agreement as justifying the increase in valuation and that Mr Stavretis’ evidence to the contrary was implausible.)

86. In response to that offer, Mr Taylor sent an email, stating:

- The valuation is coming in at $15m, I can’t go below this, especially if we are committing to more expensive resource

- Can we get you to invest upto [sic] $1,250,000?

- I can commit to 50 agents by July, 25 by Jan will be tough, but let’s have a chat. There is a few things we need to do to dismantle what we have done already

87. In relation to the 6 November 2013 email from Mr Taylor (to the effect that the valuation was “coming in” at $15 million), pleaded by the plaintiffs as the “$15M Value Representation” (i.e., a representation that, as at 6 November 2013, the value of Yatango Mobile as a going concern was $15 million), the defendants maintain that the value that Mr Taylor there attributed to the company was: clearly in the nature of an offer rather than a representation as to the objective value of the company; and expressly tied to the Acquire commitment. The defendants deny that the pleaded representation was made, and say that Mr Stavretis did not understand it to have been made.

88. On 7 November 2013, Mr Stavretis made a further offer by email to Mr Taylor, stating that “You’ve won me over. … Here is the offer”. The offer was for a $1.5 million investment on a pre-money valuation of $15 million, with an Acquire two year commitment of a minimum 50 agents from 1 July 2014 and last right of refusal for any additional staff. (The defendants say that, again, the valuation was clearly tied to the Acquire deal and that it was not just a case of two agreements being negotiated in tandem. Indeed, the defendants say that the extent to which the two deals were dependent upon one another is also clear from Mr Stavretis’ 28 November 2013 email – see below – in which Mr Stavretis said that the term sheets would not be valid until the Acquire agreement was received.)

89. The 7 November 2013 offer from Mr Stavretis was acceptable to Mr Taylor, who responded that “That’s great news! Welcome onboard [sic] mate!!”.

Negotiation of draft term sheet

90. On 8 November 2013, Mr Taylor sent Mr Stavretis a draft term sheet. Clause 2.17 of that term sheet included a number of warranties personally from Mr Taylor and Mr Wilkinson. The warranties at sub-clauses (a), (b), (c), and (e) were in the same form as those in the final term sheets as signed (although (c) and (e) became (d) and (f) respectively). (These are relied on by the plaintiffs as having given rise to certain representations in the final term sheet, which are defined as the “First IP Ownership Representation”, “First Code Assignment Representation”, “First No Infringement Representation”, and “First No Dealing Representation”. The claims dealing with the “No Dealing Representation” were not ultimately pressed.)

91. It is noted by the defendants that the plaintiffs also plead the draft term sheet as a particular of the “First Pre-Contract IP Rights Representation” but the defendants point out that that representation is materially different from any of the representations which are said to have been made in the final form of term sheet. In the defendants’ submission, the draft term sheet cannot be construed as giving rise to the pleaded representation. (Broadly speaking, I accept that the mere sending of a draft document in the context of contractual negotiation will not necessarily be a representation as to the truth of matters stated therein as opposed to a representation, say, that a party might, if the contractual terms are agreed, ultimately make such a representation. A term in a draft document might well, for example, later be discovered to be incorrect or amended before the contract is finalised. Therefore, I do not attach much significance to the sending of the draft term sheet.)

92. On 9 November 2013, Mr Stavretis sent an email with proposed amendments to the term sheet. The amendments relevantly included: an amendment to the chapeau of the warranties (such that they were now to be given by Yatango Mobile in addition to the personal warranties from Mr Taylor and Mr Wilkinson); the addition of a new sub-clause (c), to the effect that the company has a valid licence to use all intellectual property and software used by the company and is held by a subsidiary of the company and such licence is exclusive (which was in the same form as the final term sheet, and is pleaded by the plaintiffs in the final term sheet as having given rise to the “First IP Licence Representation”); and the amendment of what was sub-clause (d), to the effect that the company has not entered into any deed, contract, arrangement, assignment or understanding dealing in any way with the IP, (which was in the same form as the final term sheet as sub-clause (f), and is pleaded by the plaintiffs in the final term sheet as having given rise to the “First No Dealing Representation”). The claims dealing with the “First Authorisation Representation”, being a representation that Yatango Mobile, Mr Taylor and Mr Wilkinson had capacity and all necessary authorisations to execute and comply with their obligations under the First Contracts were also not ultimately pressed.

90. On 10 November 2013, Mr Wilkinson sent Mr Stavretis an amended term sheet. The amendments included the changes to the warranties requested in Mr Stavretis’ email. The form of the warranties in this contract was the same as those in the one that was ultimately executed.

91. The plaintiffs plead the 10 November 2013 amended draft term sheet as a particular of the “First Pre-Contract IP Rights Representation”. The defendants submit that no such representation was made in the amended draft term sheet. It is noted that Mr Stavretis said in cross-examination that the proposed amendments to the term sheet had probably been drafted by his lawyer, although he may have edited them before sending the email. (The defendants place much weight on the fact that Mr Stavretis has not adduced in evidence the advice he received from his lawyer in relation to the warranties and the reasons for the changes. I address this in due course.)

92. I note that the defendants say that it is significant that the term sheet contained no rescission clause (i.e., a clause to operate if it transpired that any one or more of the contractual warranties was or were incorrect). The defendants draw from this that the plaintiffs bargained for a lower price for the shares in the event that the intellectual property was not where it was supposed to be or, in effect, bargained for a right to sue for contractual damages if warranties were incorrect (not a right to recover their money) (see T 30.24-25, 50, 31.1-9). The argument seems to be that, if a party enters into a contract with a warranty clause, that party does so thereby contemplating that the warranty might be false – and therefore that there can have been no reliance on the truth of the warranty (it being said to be some kind of insurance clause) (see T 31.11-14). At T 30-31, however, it seemed to be suggested that i.e., that it is the seeking of warranties (and not the making thereof) that demonstrates a contemplation of potential falsehood and an inability to place full reliance on the matters warranted. I have a great deal of difficulty with the defendants’ position in this regard. I see no inconsistency between relying on the truth of something that is warranted in a contract when deciding to enter into the contract, but also having an entitlement to sue for damages if the warranty turns out to be false. Nor does it seem to me to lie comfortably in the mouth of the defendants in effect that reliance could not have been placed on the truth of the matters warranted because of the very fact that the warranties were sought.

Incorporation of corporate plaintiffs

96. On 11 November 2013, Mr Stavretis instructed his accountant to incorporate Stav Investments as trustee for the Stav Investments Family Trust.

97. On 12 November 2013, Stav Investments was incorporated, with Mr Stavretis appointed as director. On the same day, LK Group Investments was incorporated.

Corporate structure information

98. Also on 12 November 2013, Mr Stavretis sent an email to Mr Wilkinson, copied to Ms Kristy Dixon (a solicitor advising Mr Stavretis), asking Mr Wilkinson to “Please send me and Kristy (cc’ed) the corporate structure and which entity has the software/IP”. Later that day, Mr Wilkinson sent an email to Mr Stavretis and Ms Dixon, saying:

Currently the proposed entity is Yatango Labs Pte Limited as per this dropbox link:

…

However, we are currently obtaining advice re a more efficient structure with the IP entity being incorporated in Ireland. I’ll send through a diagram as soon as I receive it from Pinnacle (our Tax advisors), hopefully later today.

99. It is noted that the plaintiffs rely on this email as a particular of the “First Pre-Contract IP Rights Representation”. The defendants submit that no such representation was made in the email; and that the email made clear that the structure of the Yatango Group (and which entity would own the intellectual property) was still in development.

100. The defendants further say that Mr Stavretis obviously sought for the corporate structure to be sent to Ms Dixon in order to receive advice in relation to it. The defendants submit that privilege has been waived in that advice (and that, as that advice has not been put before the Court, it can be inferred that the advice would not assist Mr Stavretis’ case). Alternatively, the defendants submit that, if it is held that privilege has not been waived, then the above inference should be drawn (from an absence of evidence which Mr Stavretis would be expected to give), regardless of whether that evidence is privileged. It is said that, given that Mr Stavretis claims to have been misled by the 12 November 2013 email, it is highly material that he has chosen to withhold the advice his solicitor gave in relation to it, which advice it is said would clearly shed light on the extent to which Mr Stavretis relied on any representation made in the email. That seems to me pure speculation, particularly where the 12 November 2013 email is clearly talking about a proposed corporate structure in Ireland.

101. On 14 November 2013, Mr Taylor sent a further corporate structure document to Mr Stavretis headed “Yatango Corporate Group”. (The plaintiffs rely on this email as a particular of the “First Pre-Contract IP Rights Representation”. Again, the defendants say that no such representation arose from the email.) The plaintiffs say that the representation as to group structure was false – as it shows that Yatango Mobile owns 100% of YMA; whereas in fact YMA was owned by Mr Taylor not Yatango Mobile. It is noted that it was only in early 2015, a few months before the two companies went into liquidation, that Mr Taylor transferred his shares in YMA to Yatango Mobile. The plaintiffs say that YMA was the operating entity within the group and the trading entity that had the contract with Optus. (The defendants complain that ownership of YMA was not a material fact that was pleaded.)

102. On 18 November 2013, Mr Kestelman sent an email to Mr Stavretis saying “I am to proceed 50/50 with you” but also asking “is it covered that no assets will be separated and spun off from the company?”.

103. On 18 November 2013, Mr Stavretis sent a further email to Mr Taylor, asking “Is the IP in Yatango PI (Ireland) yet or is the plan it will be moved?”. In response, Mr Taylor wrote “Not setup [sic] yet mate, in motion”, and Mr Wilkinson separately responded that “[i]t’s in the process of being moved”. (Pausing here, while this indicates that there was a process of restructuring as to which entity held the intellectual property, it does not suggest that it was not already held by a subsidiary of Yatango Mobile as had been previously advised.)

104. Mr Stavretis’ first affidavit sets out a conversation with Mr Taylor which Mr Stavretis says took place on 18 November 2013 (at [34]) which was to the following effect:

Mr Taylor:    I got your email. I thought it’d be easier to just give you a call.

Mr Stavretis:    I know that you’ve been seeking advice about the best structure for Yatango and the company that should hold its IP. I think it would be better to keep the structure very simple and its definitely my preference to keep the IP in Australia.

Mr Taylor:   The advice I’ve been given is to have it offshore – maybe in Singapore, but probably in Ireland.

Mr Stavretis:   I don’t agree with that. The IP should stay in Australia. Can you talk to your advisers more about this? Wat about the rest of the IP issues?

Mr Taylor:   There are no issues. Everything is sorted.

Mr Stavretis:    Ok, I’ll check if I need to make some further amendments to the term sheet in case you end up going ahead with an Irish IP entity. I’ll get back to you.

105. That conversation is relied on as a particular of the “First Pre-Contract IP Rights Representation”. In the defendants’ submission, the conversation to which Mr Stavretis there deposes is unlikely given the emails sent that day. The defendants say that Mr Stavretis did not complain in the emails about the proposal to move the intellectual property overseas. (That, however, would be consistent with Mr Stavretis understanding, or accepting, that a Yatango Mobile subsidiary could hold the intellectual property, assuming the overseas company to be so associated with Yatango Mobile.) In any event, the defendants say that little turns on that because, even if the 18 November 2013 conversation happened precisely as Mr Stavretis recounts it, the pleaded representation was not made.

106. The plaintiffs note that, by this stage, Mr Stavretis has been told that the “IP” was sitting in Yatango Mobile Labs (see the 21 October 2013 email) (an entity which in fact did not then exist), which is said to be a subsidiary of Yatango Mobile (again, see the 21 October 2013 email) and he was being told that it was to be moved to Yatango Pte Ltd in Ireland (which was to be 80% owned by Yatango Mobile) (matters which did not eventuate).

107. Pausing here, this shows the artificiality of some of the defendants’ submissions, in that there is no suggestion (in the response by Mr Taylor or Mr Wilkinson to the 18 November 2013 email) that there was not some “IP” presently held by an entity known as Yatango Mobile Labs that was to be transferred to a company to be incorporated in Ireland; nor that the “IP” was not to be held by a subsidiary of Yatango Mobile (whether that be Yatango Mobile Labs or the Irish company); nor was there any suggestion that they did not understand what was meant by “IP” (and, had there been, it would have been implausible since it was they who were promoting the unique nature of their billing and provisioning system, the intellectual property in which had been the subject of the earlier queries). The defendants must be taken to have understood that, whatever that intellectual property comprised, it was this that the plaintiffs were being told was then owned by Yatango Mobile Labs and was to be held by Yatango Mobile or a subsidiary of Yatango Mobile. Hence, however technically one construes the contractual warranties (and, as I have earlier indicated, technicality was a hallmark of the defendants’ submissions), the claim based on representations does not require the same construction based exercise – rather, it turns on what would objectively have been conveyed to a reasonable person in the position of the plaintiffs as to the “IP” that was said to be “in the process of being moved”. As it turns out, that process seems to have been little more than a contemplation by the defendants that an Irish company might in future be set up to which the “IP” might be moved (from wherever it was then held) to facilitate the global expansion of the business.

108. On 19 November 2013, Mr Stavretis sent an email to Mr Taylor and Mr Wilkinson, attaching a further updated term sheet and a Contact Centre Services Agreement between Acquire and YMA. Various iterations of the Contact Centre Services Agreement were exchanged by Mr Stavretis and Mr Wilkinson.

109. On 27 November 2013, Mr Stavretis sent an email to Mr Taylor and Mr Wilkinson, confirming that Stav Investments and LK Group Investments were the entities entering into the respective term sheets and attaching the “final” terms sheets.

Execution of term sheets

110. Mr Wilkinson sent an email on 28 November 2013 to Mr Stavretis at 11.21am, saying “Can you please execute along with Larry [Kestelman] and send back before we sign the Acquire agreement”. The plaintiffs thus say that the defendants wanted to “lock in” the Yatango Mobile investment before committing to Acquire.

111. On 28 November 2013, LK Group Investments executed the term sheet and Mr Stavretis, on behalf of Acquire, signed the Contract Services Agreement (the Acquire Agreement) (which provided for a minimum commitment as from 29 November 2013).

112. On 28 November 2013 at 5.39pm, Mr Stavretis sent to Mr Taylor and Mr Wilkinson an email attaching the three agreements (a term sheet for each corporate plaintiff and the Acquire agreement) but stating that “all three documents are provided subject to Yatango and all applicable parties executing all 3 documents simultaneously, and are not valid until I receive all documents executed accordingly their [sic] current form, within 24 hours”.

113. The plaintiffs note that the term sheets attached to Mr Stavretis’ email of 28 November 2013 were modified to reflect the proper consideration of $750,000 each (as opposed to $1.5 million each). The plaintiffs note that there was also an amended Annexure A showing the overall investment amount split into two investors. In an email on 29 November 2013, Mr Stavretis amended cl 1.2 to remove reference to Stav Investments as trustee for the Stavretis Family Trust and instead refer to Stav Investments Family Trust (although the signing page retained the reference to the Stavretis Family Trust) (see T 18.46-50, 19.1-6 regarding two important changes to Annexure A).

114. Pausing here, with respect to the Limitation Act point, the plaintiffs say that the sending of the signed terms sheets early in the evening on 28 November 2013 cannot have been acceptance of the offer comprised by the document sent in the 11.21am email because variations had been made to the documents; and, second, that acceptance was to be on the specific basis that all 3 documents were signed simultaneously (and received by Mr Stavretis within 24 hours).

115. On 29 November 2013, Mr Stavretis sent to Mr Wilkinson and Mr Taylor an email attaching the updated term sheet executed by him as director of Stav Investments with the Stav Investments Family Trust recorded in the term sheet; and asked for Mr Taylor to sign. Mr Stavretis’ evidence that on that date he also arranged two personal loans from Acquire Asia Pacific Manila Inc (AAPMI) (of which Mr Stavretis is director, and which forms part of the Acquire group of companies) for himself and Mr Kestelman (for the investment amount).

116. On 29 November 2013, Mr Wilkinson sent an email to Mr Stavretis and Mr Taylor, attaching Mr Wilkinson’s executed term sheet (thus within the 24 hours that had been stipulated by Mr Stavretis).

Executed term sheets – First Contracts

117. It was not until 2 December 2013 that Mr Wilkinson sent the fully executed terms sheets and the Acquire Agreement to Mr Stavretis (by Dropbox link). On that day, two transfers of $750,000 each were made to Yatango Mobile (on behalf of Stav Investments and LK Group Investments, respectively). (Pausing here, it seems to me not insignificant that the transfer of moneys only took place after the three “fully executed” documents were sent to Mr Stavretis on 2 December 2013, which is consistent with the parties’ understanding being that it was not until then that there was a binding agreement for the investment – certainly there is no evidence that on 28 or 29 November 2013 Mr Wilkinson or Mr Taylor was insisting on payment because a binding agreement had already been finalised.)

118. The plaintiffs thus say that the agreements did not become binding until 2 December 2013 (relevant to the issue of the limitations defence to the LK Group Investments’ claims in respect of the first of the term sheet contracts).

119. The first term sheets (dated 28 November 2013), provided that Mr Stavretis and Mr Kestelman would, through their nominated entities, each invest $750,000 in Yatango Mobile in order to acquire 612,217 shares, equivalent to 4.545% of Yatango Mobile’s equity on a pre-money valuation (i.e., a value of the business prior to the contribution of the investment moneys) of $15 million. These are referred to in the commercial list documents as the “First Contracts”.

120. The investors pursuant to the signed term sheets were the respective corporate plaintiffs (both of which had been incorporated on 12 November 2013, apparently for the specific purpose of making the investments into Yatango Mobile). As noted, the plaintiffs allege (and ultimately the defendants did not seem to challenge) that the corporate plaintiffs entered into the term sheets in their capacity as trustees of the respective trusts referred to above.

121. Clause 2.17 of each term sheet included personal warranties by Mr Taylor and Mr Wilkinson (as well as the same warranties by Yatango Mobile). The warranties in the respective Terms Sheets for each of the corporate plaintiffs are identical. Of those, the plaintiffs ultimately relied on the following warranties:

(a)   the Company (or one of its subsidiaries) owns the intellectual property used in relation to the Company’s business (Intellectual Property) both legally and beneficially;

(b)   all code used by the Company which has been developed by employees of Company or third parties has been assigned to the Company Mobile or a subsidiary of the Company;

(c)    the Company has a valid license [sic] to use all Intellectual Property in the software used by the Company that is held by a subsidiary of the Company and such license [sic] is exclusive, perpetual and has been granted for nominal consideration;

(d)    the use of the Intellectual Property by the Company does not infringe any rights (including the intellectual property rights or moral rights) of any third party;

…

(f)   except as indicated in this Term Sheet, the Company has not entered into any deed, contract, arrangement, assignment or understanding dealing in any way with the Intellectual Property;

…

(j)   the Company and each of Taylor and Wilkinson has capacity and all necessary authorisations unconditionally to execute and comply with its or his obligations under this Term Sheet and this Term Sheet constitutes its or his valid and legally binding obligations and is enforceable against it or him by the Investor in accordance with its terms;

…

Acquire Agreement

122. The Acquire Agreement (headed “Contact Centre Services Agreement”) was entered into between Yatango Mobile and Acquire. As at the date of the First Contracts, Mr Stavretis and Mr Kestelman were both directors of Acquire and were the ultimate owners of Acquire through various entities. Acquire operated a call centre in the Philippines. Pursuant to the Acquire Agreement, Yatango Mobile was to be provided with call centre services by Acquire.

123. An initial proposed Acquire contract provided for an agreed minimum spend by 30 September 2014 of $144,000 (i.e., a minimum spend of around $14,400 per month over a 10-month period). As ultimately executed, the minimum spend was increased to $156,000 for that period. The plaintiffs say that there was nothing particularly attractive about the Acquire Agreement – that there was no real commercial value because, under the contract, there was revenue of about $15,000 per month (compare this with a $1 million investment in Yatango Mobile) – and hence, as I understand it, that there was no particular benefit to Acquire such as might have put them in a position of conflict vis-à-vis their duties to the corporate plaintiffs. The defendants on the other hand argue that entry into this agreement was in breach by Mr Stavretis and Mr Kestelman of their duties as directors of the respective corporate plaintiffs (since it involved a benefit to a separate company, Acquire, in which they held an interest, to the detriment of the corporate plaintiffs – since they paid an increased price for their investment on the basis of entry into the Acquire Agreement). As noted, this is disputed by the plaintiffs.

Request for further investment in 2014

124. On or about 2 April 2014, Mr Taylor approached Mr Stavretis regarding the need to raise additional funds as part of a “Pre IPO Funding Investment Round”. At the time, Mr Taylor was planning an initial public offering (IPO) of shares in Yatango, which owned about 60% of the shares in Yatango Mobile. Mr Stavretis deposed that the conversation went as follows, in his first affidavit at [38]:

Mr Taylor:    We need to raise some additional funds and are thinking about doing it pre IPO.

Mr Stavretis:    What do you need more funds for? We invested in the company not long ago. I thought you would still be using those funds to keep growing the company.

Clause 2.17(c)

513. Clause 2.17(c), which has been extracted above, provided that Yatango Mobile and each of the defendants warranted, jointly and severally, that Yatango Mobile had a valid licence to use all intellectual property in the software used by Yatango Mobile and that such licence was exclusive, perpetual, and had been granted for nominal consideration.

514. I accept that the evidence supports the conclusion that Yatango Mobile did have a licence to use the intellectual property in the software (as Mr Apps’ evidence made clear) (albeit that it was strictly not in relation to software that was “held by a subsidiary of the Company”) but there is nothing to support the conclusion that it was a perpetual licence (and it is not clear that it was exclusive). Therefore, strictly speaking, I consider that there was a breach of this contractual warranty also (and that the corresponding representation was misleading or deceptive) although it may be difficult to establish loss flowing from this breach of warranty it is accepted that there was a bare licence (and the fact that it was not expressed to be exclusive or perpetual does not necessarily establish that damage was suffered as a result).

Clause 2.17(d)

515. Clause 2.17(d), which has been extracted above, provided that Yatango Mobile and each of the defendants warranted, jointly and severally, that the use of the intellectual property by Yatango Mobile did not infringe any rights, including the intellectual property rights or moral rights, of any third party.

516. I am not persuaded that there has been a breach of this contractual warranty in light of the bare licence that Mr Apps appears to have conceded was in existence.

Clause 2.17(k)

517. Clause 2.17(k) of the Second Contracts, which has been extracted above, provided that Yatango Mobile and each of the defendants warranted, jointly and severally, that Mr Taylor and Mr Wilkinson will effect a “roll up” of all shareholders in Yatango Mobile such that their respective shares in Yatango Mobile will be exchanged on a one for one basis for shares in Yatango Pty Ltd by no later than 31 August 2014 resulting in Stav Investments and LK Group Investments having the same percentage of shares in the new entity as they did in Yatango Mobile and all rights attaching to those shares granted under the Second Contracts will be transferred to apply to the shares held in the new entity.

518. An argument was put by the defendants that cl 2.17(k) (expressed in the future tense, and lacking in detail as to how the roll-up would be effected) constituted an agreement to agree, as opposed to a warranty per se. It is useful to note at the outset that the word “warranty” has been said to be “one of the most ill-used expressions in the legal dictionary” (Finnegan v Allen [1943] KB 425 at 430 per Lord Greene MR). However, the term warranty includes within its expansive range of meanings a promise that something will be done in the future: see, eg. Heydon, Heydon on Contract: The General Part (Thomson Reuters, 2019) at [7.330]. Whereas, to agree to agree is to defer the whole or some part of an agreement to the future, that is, to leave undetermined the essential terms of the agreement until some future date (Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd (2016) 260 CLR 1; [2016] HCA 26 at [59] per Gageler J). That is not the case here.

519. The effect of this contractual warranty seems to me that it was an assurance or warranty that the “roll-up” there provided for would be effected by the defendants within the time stipulated. It was in that sense that I consider that the defendants warranted that it would occur in the future. It is not expressed as an agreement per se (and I consider that the parties and their legal advisers would have been well capable of making provision to that effect had it been so intended).

520. Further, it is a warranty as to something that will happen in the future (which did not happen) so that, to the extent that it is relied on as a representation then the evidentiary onus falls on the defendants to establish that there were reasonable grounds for the making of that representation (and the defendants, though positively pleading the existence of reasonable grounds, did not themselves give evidence to discharge that onus).

521. I find that there was a breach of this contractual warranty in the Second Contracts (and that the corresponding representation was misleading or deceptive).

Damages for breach of contractual warranties

522. As to the damages for breach of the contractual warranties, the measure of loss is to place the plaintiffs in the position in which they would have been had the warranties proved to be correct. In this regard, I have some difficulty in assessing the loss arising as a result of the respective contractual warranties since it is not apparent that the ultimate demise of the failed business was due to the fact that the contractual warranties were incorrect.

523. The plaintiffs, however, argue that the circumstances of this case are on all fours with the case of McRae, in that what the plaintiffs contracted to buy were shares in a company with an unique online platform (with the software and coding warranted under the terms sheets) and that this did not exist, in the sense that the intellectual property underpinning the online platform was not owned by Yatango Mobile, and the platform was thus, in effect, valueless. The plaintiffs maintain that a departure from the so-called rule in Potts v Miller is warranted on the basis that they were in effect locked-in to their investment in a company which was not publicly listed and that the shares they acquired were worthless without ownership of the intellectual property to support the online platform. Hence it is said that the appropriate measure of compensation for the corporate plaintiffs is the repayment of the amount they expended in acquiring the investment.

524. It seems to me that there is a distinction here to be drawn between the McRae type of case and the present. Here, the shares existed but the contractual warranties as to matters relating to the coding or software for the online platform on which the value of the business (and hence the shares) depended proved to be incorrect. I would therefore have been inclined simply to order nominal damages for the breaches of contractual warranty in relation to the coding (but in light of my conclusions as to the misleading or deceptive conduct claims nothing turns on this).

525. Similarly, as to the “roll-up” warranty I am left in doubt as to what loss was ultimately suffered by reason of the fact that the roll-up did not occur.

Misleading and deceptive conduct claims

526. At the outset, it is important to note that the incorporation of the representations within the contract as warranties does not disentitle the plaintiffs from pursuing statutory remedies for misleading and deceptive conduct (Alati v Kruger (1955) 94 CLR 216; [1955] HCA 64 at 220 and 222 per Dixon CJ, Webb, Kitto and Taylor JJ).

527. As to the misleading or deceptive conduct claims, I have already noted my conclusion that the Federal ACL does not apply but that the other statutory provisions here invoked are applicable.

528. Whether conduct has been engaged in is misleading or deceptive is determined objectively (see Campbell v Backoffice at [25] per French CJ). Conduct will be misleading if it has a tendency to lead a person into error: (see ACCC v TPG at [39]). The question is whether the impugned conduct, viewed as a whole, and in context, had a sufficient tendency to lead a person exposed to the conduct into error, such as to form an erroneous assumption or conclusion about some fact or matter. It is noted that if individuals, such as the defendants, engage in conduct that is misleading or deceptive, they may be principally liable for that conduct, even if they were acting as an agent of a company (see Williams v Pisano at [42] per Emmett JA, with Bathurst CJ and McColl JA agreeing; Houghton v Arms (2006) 225 CLR 553; [2006] HCA 59 at [40]; Standard Chartered Bank v Pakistan National Shipping Corporation [No 2] [2003] 1 AC 959 at 973-974 per Lord Rodger of Earlsferry).

529. Reference is made by the plaintiffs to ASIC v Narain (see at [94]-[95]; [98]-[100]), where the Chief Executive Officer was held personally liable for a misleading ASX release but the company secretary was not (as the latter’s actions were ministerial in nature). The plaintiffs submit that the defendants in the present case were not merely acting as corporate organs and are personally liable for their conduct (noting that the defendants personally provided the contractual warranties, and entered into each of the First Contracts and Second Contracts personally). It is noted that the first draft of the First Contracts was prepared by the defendants, and only contained personal warranties about these matters. It is submitted by the plaintiffs that the defendants were thus not merely ministerial organs involved in making representations on behalf of the company, but that they made representations themselves as principals. I agree.

530. The allegations of accessorial liability made against each of the defendants for misleading or deceptive conduct are only pressed in the event that it is held that the defendants did not make representations personally (and hence it is not here strictly necessary for me to consider the accessorial liability claims; though I note that the plaintiffs say that knowledge of the falsity of the representations may readily be inferred from the documentary evidence, given that they have not been called to give evidence and there is force to that submission).

531. Pursuant to s 236 of the Federal ACL, s 12GF of the ASIC Act and s 1041I of the Corporations Act a person who has suffered loss or damage “because of” or “by” contravening conduct may recover the amount of that loss or damage. The contravening conduct need not be the only cause of the loss or injury suffered and it suffices if it contributed materially (see Henville v Walker at [61], [70], [106]; Mistrina v Australian Consulting Engineers [2020] NSWCA 223 at [89]). The plaintiffs note (particularly in the context of the LK Proceeding) that this may be satisfied where a misleading representation is made to a person who then causes a plaintiff to enter into a transaction (see Harvard Nominees Pty Ltd v Tiller (No 2) [2020] FCA 604 at [507] per Jackson J. Thus it is said that LK Group Investments may recover for misleading conduct which influenced any recommendation Mr Stavretis made to Mr Kestelman about the investment, which in turn influenced the investment decision made by Mr Kestelman on behalf of LK Group Investments.

532. I find that the various alleged misrepresentations arising by reference to the contractual warranties were made (having regard to the conversations and communications relied upon by the plaintiffs as set out above and to the proffering of the contractual warranties). While I accept that the mere provision of a draft term sheet would be unlikely of itself to give rise to a representation that the content of the matters set out in the draft was true (not least because draft documents may well be the subject of amendment and clarification in due course), I consider that the combination of the representations made in the oral conversations and the email communications together with the final warranties in the term sheets as executed did amount to representations which have been shown to be misleading or deceptive for the reasons set out when considering the contractual warranties.

533. As to the balance of the alleged representations, I find as follows.

Pre-Contract IP Rights Representations

534. First, as to the Pre-Contract IP Rights Representations (relied on in the Stav Proceeding), being representations that the intellectual property used by Yatango Mobile in relation to the operation of its business was owned by, licensed to or controlled by Yatango Mobile, I find that those representations were made (by reference to the conversations and email communications on which the plaintiffs have relied) and that those representations were misleading at least insofar as they related to the ownership or control by Yatango Mobile of the intellectual property used in the operation of its business (for the reasons set out above). I do not accept that the representations as to the licensing of the software were misleading.

Failure to Disclose Pre-Contract IP Rights Representation

535. As to the “Failure to Disclose Pre-Contract IP Rights Representation”, namely, an alleged failure to disclose the “IP Ownership Position” as defined (see as set out earlier above), I accept that there was a failure to disclose those matters. The question is whether there was some form of duty or obligation to disclose those matters such that silence on the part of the defendants would be misleading (i.e., as conveying a misleading state of affairs – see authorities on when silence or failure to disclose may be misleading, such as: Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1988) 39 FCR 546 especially at 556-558 per Lockhart J; Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 per Black CJ, 40-42 per Gummow J, as his Honour then was; W Scott Fell & Co Ltd v Lloyd (1906) 4 CLR 572; [1906] HCA 79 at 577 per Griffith CJ). Insofar as the significance of silence always falls to be considered in the context in which it occurs, I consider that the failure to disclose the true position as to the ownership of the intellectual property was misleading in circumstances where the defendants were obliged to disclose to the plaintiffs the true IP ownership position. I reach this conclusion in light of the initial queries as to the trade marks that I find were made and as to the numerous enquiries as to ownership of the IP to which the response was variously to the effect that the IP was held by a Yatango Mobile subsidiary or that the position was being sorted or had been sorted, when it clearly had not, although I do not consider that this relevantly takes the matter any further than the IP Ownership Rights Representations.

YM Asset Representations

536. As to the “YM Asset Representations” (that “the value of the software underlying Yatango Mobile’s billing system was $12,312,733” and “Yatango Mobile’s net asset position was $9,560,322”), I have more difficulty. Certainly, the consolidated group balance sheet indicated that there was an asset within the group in respect of the software for the billing system which had a value attributed to it of in excess of $12 million; and that the assets of Yatango Mobile were as there recorded. However, I am inclined to think that this represents no more than that this was the directors’ view at the time (and in any event I am not persuaded that the plaintiffs relied on such a representation – since I consider that they are more likely to have relied on their own views of the value of the billing system and assets of Yatango Mobile – based on Mr Stavretis’ so-called due diligence). Therefore, I do not find this claim made good.

$15M Value Representation

537. Again, as to the “$15M Value Representation” (i.e., that “the value of Yatango Mobile as a going concern was $15,000,000”), I do not find that such a representation was made (or, If made, was relied upon). The email dated 6 November 2013 sent by Mr Taylor to Mr Stavretis (on which reliance is placed for this representation) was vague in its terms (referring simply to a valuation “coming in” at $15 million). In the absence of anything more specific I do not accept that it would have conveyed that there was some formal valuation being obtained and it is relevant to note that the plaintiffs do not seem to have enquired then or at any later time as to provision of any such valuation. It seems to me more likely that this was part of a negotiation process in order to reach a bargain as to the notional value to be attributed to the company for the purpose of the proposed investment.

Pre-Contract Roll-Up Representations

538. Finally, as to the “Pre-Contract Roll-Up Representations”, I find that they were made by the proffering of the contractual warranties and, so far as they were representations as to future intention, I am not persuaded that there is evidence to establish that there were reasonable grounds for the making of those representations.

539. I consider that reliance has been established on the representations that I have found were made (and indeed that they were intended to induce reliance by way of entry into the respective contracts).

540. As to the contention that reliance has not been established on the representation being made by the defendants in their personal capacities, as noted above I do not accept that contention. It is clear that the plaintiffs were relying on the warranties being made personally by the defendants (since they were expressed as such) and I consider that the representations were also relied upon in that context. As to Mr Stavretis personally, I accept that he relied on the pre-contract warranties when committing Stav Investments to the contracts and I accept that he suffered loss by reason of the loan arrangements entered into for him to fund the acquisitions by the company. The fact that the loan arrangements were entered into at the end of the respective financial years does not seem to me to alter that position. Rather, it is consistent with Mr Stavretis documenting what was the intended arrangement between him and his company at the end of the financial year.

Damages for misleading and deceptive conduct

541. As to the damages recoverable for the misleading or deceptive conduct, I consider that this is properly a “no transaction” case in the sense that the plaintiffs assert that they would not have entered into the transaction were it not for the misleading representation; and that the corporate plaintiffs should therefore be put in the position where they are compensated for the entirety of their investment in Yatango Mobile (Wyzenbeek v Australasian Marine Imports Pty Ltd (in Liq) (2019) 272 FCR 373; [2019] FCAFC 167). As I said in Xu v Lindsay Bennelong Developments Pty Ltd [2020] NSWSC 1692 at [460], an award for damages in a “no transaction” case in a suit for misleading and deceptive conduct requires the court to be satisfied that, “but for” the conduct at issue, the plaintiff would not have entered into the transaction, and so would not have suffered the loss. I am so satisfied in the present case.

542. Insofar as the Potts v Miller test is concerned, what they acquired were shares in a company that (without ownership or control of the software or coding in which the value of its business lay) was not a going concern. To the extent that the plaintiffs had obtained a benefit from that investment then it would be appropriate for them to account for that benefit. However, no such benefit was shown to have been derived (and I accept that it was for the defendants to establish such a benefit). While Mr Potter accepted that the holding of a licence might possibly change his analysis on Scenario 1, he made clear that it would not be likely to change by much (since the licence was not a perpetual licence and hence there would be no security that the licence would endure). Given that the value attributed to the company was fundamentally in its online platform, I consider that the appropriate scenario to adopt is Mr Potter’s Scenario 1. The effect of this (pending determination of the contributory negligence and proportionate liability and apportionment claims by the defendant) is that the plaintiffs would be entitled to damages equivalent in amount to their investments effected by the First and Second Contracts.

543. Turning then to the claim in contributory negligence, I am not persuaded that this has been established. A finding of contributory negligence turns on an examination of the factual circumstances in order to determine whether the plaintiffs contributed to their own loss by failing to take reasonable care of their person, property or economic circumstances (see Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6 at [30] per Gleeson CJ, McHugh, Gummow and Hayne JJ). Contributory negligence is to be determined objectively: a plaintiff will be guilty of contributory negligence where they expose themselves to a risk which might reasonably have been foreseen and avoided, and suffer damage within the class of risk to which they exposed themselves (Joslyn v Berryman (2003) 214 CLR 552; [2003] HCA 34 at [16] and [32] per McHugh J).

541. In the context of misrepresentation, and misleading and deceptive conduct, Sir Nicholls VC in Gran Gelato Ltd v Richcliff (Group) Ltd [1992] Ch 560 at 574 held that “[i]n principle, carelessness in not making other inquiries provides no answer to a claim when the plaintiff has done that which the representor intended he should do”. Of relevance in determining whether reliance upon a misrepresentation was negligent is whether a due diligence process was undertaken; whether there was an obligation (or indeed an ability) to “double guess” the representation given; and whether there was exhibited a lack of care in performing the actions induced by, and consequent upon, the misrepresentation (ABN AMRO at [1470]). Where the information available to the plaintiffs did not identify with sufficient clarity the risks of the investment, where the defendants failed to disclose those risks which they themselves knew about, and where instead the defendants made repeated representations as to the lack of risk, the plaintiffs were entitled to accept the defendants words and deeds at face value, particularly in light of their repeated inquiries as to the possible risk, and the defendants repeated assurances that the risk had been “dealt with” in response (ABN AMRO at [1480]).

542. The suggestion that there was a failure to look after the plaintiffs’ own interests because they invested in Yatango Mobile when they were aware it was in financial distress is hardly an attractive argument when the defendants were pressing for the investment.

543. As to the defences based on proportionate liability principles, I am not persuaded that these are made good. Part 4 of the Civil Liability Act makes provision for the apportionment of liability. Similarly, ss 1041H, 1041I, and 1041L of the Corporations Act, s 87CD of the Competition and Consumer Act and s 12GR of the ASIC Act are cognate provisions. Each of these regimes provides for the apportionment of responsibility for the damage arising out of the misleading or deceptive conduct of multiple wrongdoers. The various provisions provide for proceedings involving an apportionable claim (here satisfied by virtue of s 87CB(1) of the Competition and Consumer Law, s 12GP of the ASIC Act, and s 1041L of the Corporations Act) involving concurrent wrongdoers. In such proceedings, the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss.

544. Under this regime, liability is apportioned to each wrongdoer according to the court’s assessment of the extent of their responsibility (Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613; [2013] HCA 10 at [10] per French CJ, Hayne and Kiefel JJ).

545. Where an apportionable claim exists, and concurrent wrongdoers have been identified, the task of the court in apportioning liability will be guided by consideration of blameworthiness, causative potency, any benefits or profits obtained by one concurrent wrongdoer, the task the wrongdoer is required to perform, and the degree of departure from the requisite standard of care (Reinhold v New South Wales Lotteries Corp (No 2) (2008) 82 NSWLR 762; [2008] NSWLR 187 at [50] and [61]; Mitchell Morgan Nominees Pty Ltd v Vella [2011] NSWCA 390 at [3] (which was overturned by the High Court, although not on this point)).

546. Insofar as Yatango Mobile is said to be a concurrent wrongdoer it is clear that the company was in effect the corporate emanation of the defendants. As to the position in relation to the Acquire Agreement, I accept that it has not been shown that entry into this agreement was in breach of any duty owed by Mr Stavretis and Mr Kestelman to their respective associated companies but, even if there was, it would be open to them to have ratified that breach (and implicitly they may be taken to have consented to entry into the Acquire Agreement). Finally, as to the submission that Mr Kestelman’s reliance on Mr Stavretis’ due diligence in some way amounted to negligence on his part (or that there was a breach of some duty by Mr Stavretis) I do not accept that this is established. I see no breach of any duty of care owed by Mr Kestelman to LK Group Investments in relation to the reliance placed by him on his business associate being the point of contact in the negotiations; and I do not accept that Mr Stavretis was in breach of any duty owed to Mr Kestelman in relation to the (seemingly idiosyncratic) way in which he conducted his due diligence in relation to the acquisition.

547. The reality is that the defendants induced the plaintiffs into investing substantial sums into Yatango Mobile business on the faith of representations (backed up by contractual warranties to the same effect) that Yatango Mobile had an unique online platform with considerable value that differentiated itself from its competitors and, when asked directly as to the ownership of the intellectual property (underpinning that platform), they misrepresented the true position.

Orders

551. For the above reasons I make the following orders:

1. In the Stav proceeding, order that each of the first and second defendants pay Stav Investments damages of $1,012,500.00 for contraventions of s 1041I of the Corporations Act 2001 (Cth), s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (NSW).

2. In the Stav proceeding, dismiss the second plaintiff’s claims.

3. In the LK Group Investments proceeding, order that each of the first and second defendants pay LK Group Investments of $1,012,500.00 for contraventions of s 1041I of the Corporations Act 2001 (Cth), s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the Australian Consumer Law (NSW).

4. Order that the first and second defendants pay the plaintiffs’ costs of the proceedings.

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Decision last updated: 09 March 2022